How Does PE Compare to Public Markets? PitchBook’s PME has the Answer

Over the last 13 ¼ years, PE funds have generated a compound annual growth rate (CAGR) of 8.9% compared to 2.8% for the Russell 3000® Index PME+ Vehicle. | Source: PitchBook

PitchBook’s PME+ benchmark above, which looks at the aggregated performance of private equity funds against the Russell 3000® Index based to 100 at the beginning of 2000, shows impressive returns for private equity funds. Over the last 13 ¼ years, PE funds have generated a compound annual growth rate (CAGR) of 8.9%, compared to a CAGR of 2.8% for the Russell 3000® Index PME+ vehicle. Much of the run-up in value for private equity funds occurred between 2005 and 2008, when funds were distributing unprecedented levels of capital back to their limited partners.

In addition to the massive amounts of capital being distributed, private equity funds were investing record levels of capital at higher valuations and with more leverage than ever before, and subsequently marking up their investments as public equity markets surged. High levels of distributions and potentially inflated valuations helped accelerate the performance of private equity relative to the Russell 3000® Index PME+ vehicle. From the beginning of 2005 to 2007, the net asset value of private equity funds more than doubled, posting a CAGR of 27%. This is leagues beyond the CAGR of 8.2% posted in the Russell 3000 Index PME+ vehicle over the same period. These three years account for a significant amount of growth in the value of private equity funds.

Looking at a shorter time horizon, private equity funds returned similarly positive results, albeit slightly lower than the Russell 3000®. Private equity funds and the Russell 3000®Index PME+ vehicle follow a similar track over the last three years, with the Russell 3000®growing at a faster pace. Basing the index to 2009, at the trough of the market, private equity funds have posted a CAGR of 7.3% through 1Q 2013, whereas the Russell 3000®Index PME+ vehicle has posted a more impressive CAGR of 13.2%.

PitchBook’s PME+ for venture capital shows quite a different story. The aggregated performance of venture capital funds based to 100 at the beginning of 2000 posted a paltry CAGR of -2.2% as of 1Q 2013, compared to 3.5% in the Russell 2000® Growth Index PME+ vehicle. The main driver for venture’s lackluster returns over the last 13 ¼ years was the significant drop in value of tech companies after the dotcom bubble burst in the early 2000s. Since that time, venture funds have been relatively flat while the Russell 2000® Growth Index PME+ vehicle was able to recoup the early-decade losses it experienced throughout the middle of the decade.

Rebasing the index to 2009 produces quite different results than are seen over a longer time horizon. Venture funds posted a positive CAGR of 3.9%, and while this is definitely a better return than the 13-year horizon for VC funds, it falls significantly short of the returns posted by the Russell 2000® Growth Index PME+ vehicle, which has posted a CAGR of 14.9% over the last four years.

The PME+ for VC shows that venture capital funds have posted a paltry -2.2% CAGR as of 1Q 2013, compared to 3.5% in the Russell 2000® Growth Index PME+ vehicle. | Source: PitchBook

Debt funds have been able to significantly differentiate themselves from the public benchmark, generating a 10.0% CAGR since 2000 compared with a 4.1% CAGR in the Russell 3000® PME+ vehicle. Debt funds were able to ride the buyout wave throughout the middle of the decade and are currently benefiting from the prudence of private equity’s management of the high debt burdens placed on their portfolio companies during this period. PitchBook recently posted about private equity’s continuing ability to manage the mountains of debt they placed on their portfolios during mid-decade buyouts. This debt management helped debt funds avoid witnessing a much anticipated swath of defaults and mitigated their drop in value following the financial crisis. Debt funds fell only 16% in value from 1Q 2008 to 1Q 2009, compared to the 24% drop seen in private equity funds over the same period. Debt funds’ smaller drop in 2008 has allowed them to continue growing in value throughout the last decade.

Funds-of-funds have been up and down, but over the last 13 ¼ years, their returns have been relatively flat, producing a CAGR of around 0% compared to the 2.9% CAGR posted by the Russell 3000 PME+ vehicle.

For more on PitchBook’s PME benchmarks, which utilize fund returns data from more than 6,400 global funds, as reported by LPs and investors, be sure to download the 4Q 2013 Global PE & VC Benchmarking & Fund Performance Report when it releases on Wednesday.